Signs of Hope for Eastern European Tech Sector

VIENNA—If you were to light up a map of Europe based on the buzz generated by its tech sector, the U.K. would burn bright alongside the Baltic rim countries. France might be flickering, the Med countries would be a bit gloomy. A warming glow would come from Turkey and even Russia. But a Stygian blanket would lie across most of central and in particular south eastern Europe.

Perhaps Poland might escape, and pin-pricks of light might break through, but swathes of Mitteleuropa would lie in darkness. But the blanket hides a region of undeniable talent and an area where things are slowly beginning to take form. The recent Pioneer’s Festival held in the opulent Hofsburg palace in Vienna provided a spectacular backdrop for many of the region’s entrepreneurs and investors to pierce the darkness.

To build an ecosystem you need three key blocks: talent (both engineering and entrepreneurial), access to finance, and the culture to support it. One, maybe the only, beneficial legacy of the years of Soviet oppression was a heavy emphasis on engineering and math. According to Lyuben Belov, who runs investment fund Launchub in Bulgaria, “There are more engineers coming out of universities than other specialities. When Bulgaria was part of the Soviet Bloc it focused on high-tech industries. Since the 1970s Bulgaria has been a high-tech center.”

Adel Zakout CEO of OpenBuildings, also based in Sofia, Bulgaria, questioned whether local talent, while technically very good, is suited to entrepreneurial life. “Most [programmers] come from studios or from agencies. They don’t have the start-up culture, they don’t have a culture of being innovative.”

Perhaps inevitably the strong management deficit is one of the biggest inhibitors to growth, suggests Max Niederhofer, a parter at Venture Capital firm Accel Partners. “What are we building?” he asked. “If you are building domestic champions then the local talent is adequate. If we are trying to build world-class companies than there is a lot of work to be done.”

As a representative of one of the key European players, Mr. Niederhofer would do well to listen to the complaints by many in the region. Mr. Zakout got funding from Index but says he never sees the big VCs in town.

Olliver Holle—co-founder of SpeedInvest, a Vienna-based investment fund—was marginally more charitable. “Tier one investors are coming to events [in the region], but they don’t invest.”

Nor is lack of investment a problem just suffered by the former Communist states. Johann Hansmann is one of Austria’s best known angel investors. He is highly critical of the investment landscape. “I just started as an investor just 2.5 years ago and I am by far the best-known investor in Austria. It should not be like that.”

Aware of the problems in funding, the Austrian government has a generous public scheme which can see grants of €100,000 ($128,000) and more given to Austrian entrepreneurs. According to Matthias Bischof of Austria Wirtschaftsservice, the dispensing body, the government stepped in because: “There is no VC market in Austria. In the past money came from just one source, Austrian private banks, but since the economic crisis they totally stopped their investment.”

Political culture appears to be a major obstacle. Both Bulgaria and Romania continue to give the EU cause for concern regarding their anticorruption framework. Candidate member Croatia also has issues, said Zagreb-based entrepreneur Ivo Špigel.

“The political elite [in Croatia] has not helped. It has been mostly looking out for their own interests. This has held the country back,” he said. He contrasted the attitude of the Balkan government with that of Baltic Estonia. “There was a very strongly held common view in Estonia of what was good for the country. We did not see that.”

But he said a new generation of younger civil servants and politicians who ‘get it’ was coming up. “They want to support us.” He is also optimistic that when Croatia accedes to the European Union in July 2013 it will be a stimulus for the fledgling scene.

“All of the startups from across the former Yugoslavia will move to Zagreb. They know us, we speak the language, and being inside the European Union will be a big pull. I hope we become an important regional hub.”

Alas, one way that the CEE region is exactly like the rest of Europe is the lure of Silicon Valley. Companies from the region that achieve success typically vault over the rest of Europe and head to California. Do they look at Europe at all? Why would they, asks Mr. Niederhofer. “Europe is not the gatekeeper of anything. We do see some companies set up shop in the U.K. before they make the jump to the U.S.. Of course there are exceptions, but mostly they don’t.”

A lot of the issues you hear entrepreneurs from the region describe are common to all of Europe; funding, fragmented markets, culture. However, there are encouraging signs. “We are starting to see a reverse brain drain,” said Mr. Zakout. “It turns out there are a lot of Bulgarians in high positions in Google and other companies coming home.”

He also pointed to the low costs in the region, making it a great place to run a company. “It is significantly cheaper than the U.K. or Germany. That was one of the reasons we had the investment. We had a $2 million Series A and we have been running for the past 18 months and we still have a lot of cash left. It is a no-brainer.”

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Tech Europe covers Europe’s technology leaders, their companies, and the people and industries that support them — and their ideas. The blog is edited by Ben Rooney, with contributions from The Wall Street Journal and Dow Jones Newswires.